THE ABILITY TO PAY PRINCIPLE

Another way to evaluate the equity of a tax system is called the ability to pay principle, which states that taxes should be levied on a person according to how well that person can shoulder the burden. This principle is sometimes justified by the claim that all citizens should make an “equal sacrifice” to support the government.

The ability-to-pay principle leads to two corollary notions of equity: vertical equity and horizontal equity.’ Vertical equity states that taxpayers with a greater ability to pay taxes should contribute a larger amount. Horizontal equity states that taxpayers with similar abilities to pay should contribute the same amount. Although these notions of equity are widely accepted applying them -to evaluate a tax system is rarely straightforward.